Exchange-Traded Funds (ETFs) are investment products that hold a pool of individual securities, giving you a diversified portfolio with just one purchase. ETFs trade like stocks, so they can be bought and sold throughout the market day, and they offer quick portfolio diversification. ETFs are available for a variety of asset classes including all the major indexes (such as the Dow Jones Industrial average or the NASDAQ Composite), large and small cap companies, real estate investment trusts, bonds and even commodities such as gold.

ETFs may sound similar to mutual funds, but they are fundamentally different. While ETFs trade intraday, mutual fund transactions only occur at the close of the market. A mutual fund's price is based on the closing day prices for all the stocks in the fund. Since ETFs trade all day long, they allow you to lock in a price for the underlying stocks instantaneously. In addition, there is no minimum investment required to purchase an ETF. You can buy as little as one share.

ETFs are increasing in popularity due to their many benefits, including:

• Lower Costs - Expenses can have a significant impact on your returns. ETFs, in general, have lower annual expense ratios than other investment products. ETFs are less likely to have high management fees because they are index-based and not actively managed.
  
  
• Diversification - Because an ETF is a basket of securities, it inherently provides diversification across an entire index.
  
  
• Asset Allocation - Asset allocation is important to any investor. There are ETFs to represent almost every asset class available. Through ETFs, you can easily invest in an asset class such as large-cap stocks without having to single out a particular stock.
  
  
• Tax Advantages - Due to the way ETFs are created, they allow you to pay most of your capital gains upon the final sale of the ETF. Delaying the payment of capital gains allows that money to continue to grow and accumulate wealth.
  
  
• Options - An option is the right to buy (called a call) or to sell (called a put) a stock at a certain price before a particular date. At Scottrade, you can buy calls, sell a covered call or buy a put on ETFs. A covered call is used to either generate additional income (over dividends) from shares of the underlying stock, and/or provide a limited amount of protection against a decline in the underlying stock value. Puts could be purchased if you are concerned with a downward price move in the underlying stock.
  
  
• Shorting -Shorting is when you sell borrowed shares of an ETF with the expectation the price of the ETF will fall. If the ETF's price does fall, you can then purchase the ETF at the lower price and make a profit. Index Mutual Funds are not available for short selling. Shorting is an advanced technique and involves substantial risk. You must have a margin account to be able to short ETFs. If you would like to upgrade your account to a margin account, please contact your local Scottrade Branch Office.
  
  

To learn more about Exchange-Traded Funds, check out the ETF Education Center. You can access the education center through the ETF Research link located under the Research tab in ScottradeELITE.

Kristin McDougall
Manager of Customer Education at Scottrade, Inc.